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Costco chic
I finally crawled out from under the rock I was hiding and visited my first Costco last week, albeit in Veracruz, Mexico. Their business model seems to focus on stocking only profitable items that can be bought and stored in bulk. They do not relish the idea of the loss leader or the cross subsidy, but instead they evaluate items in stand-alone terms and look for high turnover. Inventory costs are low because what they have is right there in the store on pallets. They don't seem to stock much in the way of competing brands and you see "Kirkland" -- their house label -- frequently; presumably buying from a single vendor lowers their costs further. As for the store I visited, two thirds of the stuff was hard to find and half of it was hard to reach. There was a surfeit of cranberry juice, which is otherwise uncommon in Mexico. There was lots of U.S. Grade A beef and canned goods. No one asked me to become a member. It would be a good place to stock up for a party but I can't imagine shopping there regularly: too many of my favorite items are missing and they don't have the hardcore best of Mexican foodstuffs, which are found in the traditional markets. Since they have over thirty stores in Mexico perhaps the formula is working.
Here is an NYT article about the U.S. phenomenon of Costco chic.
Posted by Tyler Cowen on January 5, 2008 at 05:21 AM in Food and Drink | Permalink
Comments
a good place to stock up for a party
When you have lots of kids, every day is a party.
Posted by: Jeff Burton at Jan 5, 2008 7:21:11 AM
At first you think it's about supplying a party or large family. But it is also about making a regular, even daily, pattern of consumption, even for just one person.
Posted by: Daniel Klein at Jan 5, 2008 7:22:32 AM
Also, another dimension of the Costco experience is subsequently breaking down the unit purchased to give or exchange the surplus with familiars outside the household.
Posted by: Daniel Klein at Jan 5, 2008 7:30:12 AM
I shop at COSTCO once a week. The quality is high, the
prices are great, I get a gas discount and they pay their
workers well. They've got a great selection of imported
cheeses and lunch meat without nitrates.
Posted by: ral at Jan 5, 2008 8:18:39 AM
It took you this long to discover Costco ;)
I'm fascinated by your "two thirds of the stuff was hard to find and half of it was hard to reach" comment. What do you mean by "hard to find"? I find that most goods are within reach, so I'm confused by the "hard to reach" comment.
Perhaps the formula is working? Um, a resounding yes.
I'll second Ral's comment.
Posted by: Vincent Clement at Jan 5, 2008 8:59:08 AM
The Costco in San Diego (and probably elsewhere) also sells Mexican Coke. This is probably worth the price of admission alone: You get real sugar instead of HFCS, and the glass bottle feels nice.
After drinking Mexican Coke for a month, the HFCS version just can't compare.
Posted by: Macneil at Jan 5, 2008 9:21:50 AM
The book "Trading Up" claimed that CostCo moves more premium wine than any other US retail. Or was it more amazing that that ... more than others combined?
The weird thing about CostCo is that it mixes cheap staples with mass luxuries.
Posted by: odograph at Jan 5, 2008 9:49:40 AM
I once made the mistake of getting a Costco membership whilst being a 22yo student and only being able to use London Transport. I only went there twice in a whole year. German-based Makro is well established in the UK. They generally stock a much wider variety of goods then Costco, and their inventories are kept fresh. For example, PCs in Costco are generally 6 months out of date, both in terms of technology and price.
Posted by: Naadir Jeewa at Jan 5, 2008 9:52:26 AM
when you're back home, try the $1.50 hot dogs. Also at the food court, teenage daughter likes the pizza and the chicken bakes. We often see people leaving with between 4 and 15 freshly baked $10 pizzas.
The romaine lettuce is usually good and very inexpensive compared to elsewhere. The fresh frozen blueberries are a bargain, as are the Kirkland almonds.
Costco is a good deal for small businesses, especially small restaurants and food stalls. Our $100 membership pays for itself every year in rebates.
Posted by: chug at Jan 5, 2008 10:00:50 AM
Costco also has home furnishing stores, I've been to the one in Kirkland, WA. I really liked it, the quality and looks were up near Ethan Allen but at a much lower price.
The employees are also really attentive, I think that's because they have a much bigger stake in the company than other retailers. That and it is actually a career path so you get more "serious" employees. That and their CEO is a really nice guy. I've made a number of suggestions to them and they've always been implemented the next time I go to the store. Now if they would just carry more sizes in socks like I've been asking :)
What I don't like about the store is that they often carry a pallet of new items that doesn't appear the next time I'm in the store. I think they try out an item and if it doesn't sell out immediately they pull it. The problem is I only go there once a month, as I'm sure a lot of other people do. How can you test if something's a repeat seller if it is only in the store one time?
Posted by: BlogReader at Jan 5, 2008 10:15:40 AM
"No one asked me to become a member."
I wonder if this is true at US stores. I thought they wouldn't even let you into a Costco without a membership card. They won't let you into Sam's Club.
I oppose membership stores on principal, which is why I've never bought anything at either a Costco or Sam's. (Don't think I've ever been inside a Costco.)
Posted by: Dirk at Jan 5, 2008 10:16:17 AM
As someone trying to lose weight this new year let me say, I hate all of you.
As a Costco shopper with teenagers I can only echo the statements above. The coffee, meat selection, fresh fish (they have it one day a week), and giant freezer full of veg are all outstanding. The gas prices are the lowest in my area. And a small but still valid point for me-- it's quieter in Costco than any other store of the size and type. I don't feel like I've been through the ringer when I leave.
Posted by: The other Eric at Jan 5, 2008 10:20:00 AM
Another way to view Costco is that they have re-discovered the modern definition of staple goods, and sells these in decent quality and bulk quantity. Modern staples include pizzas, TVs, drugs, office supplies, eyeglasses, socks, and detergents in addition to the more traditional meats, grains, etc. I find that the combination of Costco, Trader Joes, and the local vegetable/fruit/dairy market meets my needs quite well for foods. The large sizes sold means that you need either a house (for the storage area needed) or a large family. I've resurrected and expanded by air-tight cannister collection.
You will find that Costco is sensitive to regional differences. The mix of goods is different in different parts of the country.
Posted by: rh at Jan 5, 2008 10:20:55 AM
I just remember Costco for hordes of massively overweight people stampeding towards the free samples as they opened up. That and a complete distortion of serving sizes... It is not just that they sell in bulk, but everything is oversized.
It really doesn't make sense for much except in the US where people have lots of extra space in their homes to store extra. I remember going to Costco in Japan for US goods, and we would usually go in groups of 6 to split everything up.
Posted by: akatsuki at Jan 5, 2008 10:26:13 AM
Oh Geez, the CostCo lunch counter is the cheapest in town, but the sat fat ... even when I walked 2mi from the office to CostCo for a hot dog I felt guilty. (I think those are 6mi dogs.)
Posted by: odograph at Jan 5, 2008 10:31:12 AM
A link to the trading up idea. Now that I skim as a refresher, one idea is a "missing middle" in products. Shoppers go "cheap" or "luxury?"
Posted by: odograph at Jan 5, 2008 10:36:47 AM
I'm curious: What's the economic intention behind the "membership models"? Aka costco , sam's club et al. I doubt the membership is a big revenue stream. So then is it some form of price discrimination? Why do they not want me in there?
Posted by: Raul at Jan 5, 2008 11:02:38 AM
When you have a baby, membership fees quickly pay for themselves just in bulk diapers and wipes.
Posted by: Dvid at Jan 5, 2008 11:03:07 AM
Costco has a very low staff turnover rate because they pay their people well and offer them opportunity to a career path.
Real drawback with the business model is that your home becomes a warehousing facility.
Posted by: Sophie at Jan 5, 2008 11:12:04 AM
A few notes on Costco . . .
If you look at Costco's financial statements, the membership revenue amount is very nearly the net profit amount. What Costco does is allow members to buy goods for the wholesale cost, plus the smallest markup in retail (not surprising since its a wholesale club). The markup is just enough to keep the lights on and pay the staff. They are able to thrive on small margins mainly because of A) extremely fast inventory turns, B) extremely high sales per square foot, and C) membership fees.
Regarding not letting non-members into the store, the controlled entry and exit limits Costco's theft problems. The size of all the items in the warehouse also limits shoplifting (notice that no small items are available in the warehouse). The extremely low loss due to theft also allows them to live on extremely small margins.
Someone mentioned that often merchandise shows up and disappears quickly. Part of that is certainly experimentation, but partly this practice creates a sense of the hunt and of urgency in Costco shoppers. If you see an item that you may like you have an incentive to buy it because you suspect that it won't be there next time you're in the warehouse. With Costco's very generous return policy, the risk of buying something you decide you didn't want is very low.
My wife and I go there at least once a week to buy fresh produce. We have no kids and have no problem getting through the quantity in the Costco bundles. Costco's inclusion of first fresh produce and then gasoline has increased shopper frequency which has driven a nice growth in revenue for Costco over the last few decades.
Bottom line, Costco's business model is to give the members the highest quality products and services at the lowest possible cost. They do this by working closely with suppliers and hiring quality employees. It's a fantastic business model with superior execution.
Posted by: Bob at Jan 5, 2008 11:55:37 AM
Generally I like Costco. However, I also notice they don't carry a lot of desired items. Take Low Sodium V-8 Juice. Costco has never decided to stock it. Instead they have a good deal on regular V-8 juice, nice except for all the sodium.
Posted by: Lefty at Jan 5, 2008 12:03:13 PM
Bob's explanation is right on. Since Costco's profit comes almost entirely from membership fees, their incentive is to provide quality goods at competitive prices to keep members renewing their membership. Another financial factoid is that their net profit margin is 1-2%, which is of course quite low and only about half of Wal-mart's net margin. Obviously, they make it up on volume.
Posted by: Joe at Jan 5, 2008 12:10:10 PM
Another important piece of CostCo's financial picture -- their payment terms on goods they purchase are longer than their inventory turns. In other words, by the time they've paid for the merchandise it's already been sold. This makes them incredibly efficient for a retailer in terms of working capital needs -- their inventory is essentially at zero cost.
Posted by: Neil Harris at Jan 5, 2008 12:10:26 PM
I think the membership fee is used as a commitment device. Once people have paid for a yearly membership, they are more likely to return because they feel they should take advantage of what they already paid for. I think the sunk cost fallacy drives most club membership models. Any other thoughts on this?
Posted by: Blake at Jan 5, 2008 12:20:04 PM
One little nitpick: I'm pretty sure Kirkland Signature products aren't bought from just one company. For example, I read a while back (not sure where) that their Kirkland Signature coffee is bought from Starbucks, despite being placed on the shelf right next to the retail-packaged (read higher costing) Starbucks coffee. KS products are generally good quality, so I'd be surprised if there was one company with such a rare commitment to quality.
Posted by: acm at Jan 5, 2008 12:45:21 PM
